Title: Audit committee financial expertise: mitigation of real earnings management

Authors: Husam Aldamen; Janice Hollindale; Keith Duncan; Mitchell Horrocks; Jennifer L. Ziegelmayer

Addresses: Department of Accounting and Information Systems, College of Business and Economics, Qatar University, Qatar ' Bond Business School, Bond University, University Drive, Robina, Australia ' Bond Business School, Bond University, University Drive, Robina, Australia ' Bond Business School, Bond University, University Drive, Robina, Australia ' IESEG School of Management, Rue de la Digue, Lille, France

Abstract: The paper examines whether and in what contexts the education and experience dimensions of audit committee financial expertise lower the propensity for real earnings management. We separate financial expertise into financial education and financial experience components and test the impact of each on three real earnings management metrics for a sample of Australian firm-years. Financial expertise is negatively related to abnormal cash flows from operations (CFO) and abnormal production costs, suggesting audit committee financial expertise mitigates real earnings management activities. Abnormal discretionary expenses are higher for firms with greater financial expertise, consistent with downward earnings management or conservative reporting. Financial experience is negatively related to abnormal CFO and production but both experience and education are positively related to abnormal discretionary expenses. Our results are largely driven by the experience dimension of financial expertise and for profitable firm-years in less profitable periods of time. Profitable firms with financial expertise exhibit unusually low CFO and production costs but unusually high discretionary expenses, consistent with prudent financial management rather than upward earnings management.

Keywords: audit committee; corporate governance; financial expertise; real earnings management; REM.

DOI: 10.1504/IJAF.2024.143380

International Journal of Accounting and Finance, 2024 Vol.12 No.1/2, pp.110 - 130

Received: 17 Sep 2023
Accepted: 02 Sep 2024
Published online: 16 Dec 2024 *

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